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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to
Commission File Number: 001-35481
RETAIL PROPERTIES OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
42-1579325
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
2021 Spring Road, Suite 200, Oak Brook, Illinois 60523
(Address of principal executive offices and zip code)
(630) 634-4200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Class A Common Stock, $0.001 par value
 
RPAI
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No x
Number of shares outstanding of the registrant’s class of common stock as of July 31, 2020:
Class A common stock:    214,252,627 shares


Table of Contents

RETAIL PROPERTIES OF AMERICA, INC.
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RETAIL PROPERTIES OF AMERICA, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except par value amounts)

 
June 30,
2020
 
December 31,
2019
Assets
 
 
 
Investment properties:
 
 
 
Land
$
1,075,551

 
$
1,021,829

Building and other improvements
3,563,583

 
3,544,582

Developments in progress
146,502

 
113,353

 
4,785,636

 
4,679,764

Less: accumulated depreciation
(1,449,947
)
 
(1,383,274
)
Net investment properties (includes $41,589 and $12,445 from consolidated
variable interest entities, respectively)
3,335,689

 
3,296,490

Cash and cash equivalents
12,563

 
9,989

Accounts and notes receivable, net
87,927

 
73,832

Acquired lease intangible assets, net
74,386

 
79,832

Right-of-use lease assets
43,696

 
50,241

Other assets, net (includes $344 and $164 from consolidated
variable interest entities, respectively)
67,151

 
75,978

Total assets
$
3,621,412

 
$
3,586,362

 
 
 
 
Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Mortgages payable, net
$
92,967

 
$
94,155

Unsecured notes payable, net
796,568

 
796,247

Unsecured term loans, net
716,992

 
716,523

Unsecured revolving line of credit
135,000

 
18,000

Accounts payable and accrued expenses
59,152

 
78,902

Distributions payable

 
35,387

Acquired lease intangible liabilities, net
65,248

 
63,578

Lease liabilities
85,602

 
91,129

Other liabilities (includes $4,752 and $1,707 from consolidated
variable interest entities, respectively)
75,798

 
56,368

Total liabilities
2,027,327

 
1,950,289

 
 
 
 
Commitments and contingencies (Note 13)

 

 
 
 
 
Equity:
 
 
 
Preferred stock, $0.001 par value, 10,000 shares authorized, none issued or outstanding

 

Class A common stock, $0.001 par value, 475,000 shares authorized,
214,253 and 213,600 shares issued and outstanding as of June 30, 2020
and December 31, 2019, respectively
214

 
214

Additional paid-in capital
4,515,716

 
4,510,484

Accumulated distributions in excess of earnings
(2,886,387
)
 
(2,865,933
)
Accumulated other comprehensive loss
(39,176
)
 
(12,288
)
Total shareholders’ equity
1,590,367

 
1,632,477

Noncontrolling interests
3,718

 
3,596

Total equity
1,594,085

 
1,636,073

Total liabilities and equity
$
3,621,412

 
$
3,586,362


See accompanying notes to condensed consolidated financial statements

1

Table of Contents

RETAIL PROPERTIES OF AMERICA, INC.
Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss)
(Unaudited)
(in thousands, except per share amounts)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2020
 
2019
 
2020
 
2019
Revenues:
 
 
 
 
 
 
 
Lease income
$
96,803

 
$
118,449

 
$
215,498

 
$
241,152

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Operating expenses
14,843

 
17,129

 
31,257

 
34,815

Real estate taxes
17,916

 
18,534

 
36,449

 
36,937

Depreciation and amortization
43,755

 
42,882

 
83,928

 
86,149

Provision for impairment of investment properties

 

 
346

 

General and administrative expenses
8,491

 
9,353

 
17,656

 
19,852

Total expenses
85,005

 
87,898

 
169,636

 
177,753

 
 
 
 
 
 
 
 
Other (expense) income:


 


 


 


Interest expense
(19,360
)
 
(17,363
)
 
(36,406
)
 
(34,793
)
Gain on sales of investment properties

 
8,454

 

 
16,903

Gain on litigation settlement

 

 
6,100

 

Other income (expense), net
215

 
(472
)
 
(546
)
 
(1,131
)
Net (loss) income
(7,347
)
 
21,170

 
15,010

 
44,378

Net income attributable to noncontrolling interests

 

 

 

Net (loss) income attributable to common shareholders
$
(7,347
)
 
$
21,170

 
$
15,010

 
$
44,378

 
 
 
 
 
 
 
 
(Loss) earnings per common share – basic and diluted:
 
 
 
 
 
 
 
Net (loss) income per common share attributable to common shareholders
$
(0.04
)
 
$
0.10

 
$
0.07

 
$
0.21

 
 
 
 
 
 
 
 
Net (loss) income
$
(7,347
)
 
$
21,170

 
$
15,010

 
$
44,378

Other comprehensive income (loss):
 
 
 
 
 
 
 
Net unrealized gain (loss) on derivative instruments (Note 8)
694

 
(6,307
)
 
(26,888
)
 
(9,821
)
Comprehensive (loss) income attributable to the Company
$
(6,653
)
 
$
14,863

 
$
(11,878
)
 
$
34,557

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding – basic
213,337

 
212,951

 
213,276

 
212,900

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding – diluted
213,337

 
213,090

 
213,276

 
213,156


See accompanying notes to condensed consolidated financial statements

2

Table of Contents

RETAIL PROPERTIES OF AMERICA, INC.
Condensed Consolidated Statements of Equity
(Unaudited)
(in thousands, except per share amounts)
 
Class A
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Distributions
in Excess of
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total Equity
Three Months Ended
Shares
 
Amount
Balance as of April 1, 2019
213,585

 
$
214

 
$
4,505,631

 
$
(2,768,965
)
 
$
(5,036
)
 
$
1,731,844

 
$
776

 
$
1,732,620

Net income

 

 

 
21,170

 

 
21,170

 

 
21,170

Other comprehensive loss

 

 

 

 
(6,307
)
 
(6,307
)
 

 
(6,307
)
Contributions from noncontrolling interests

 

 

 

 

 

 
669

 
669

Distributions declared to common shareholders
($0.165625 per share)

 

 

 
(35,388
)
 

 
(35,388
)
 

 
(35,388
)
Issuance of restricted shares
77

 

 

 

 

 

 

 

Stock-based compensation expense

 

 
1,857

 

 

 
1,857

 

 
1,857

Balance as of June 30, 2019
213,662

 
$
214

 
$
4,507,488

 
$
(2,783,183
)
 
$
(11,343
)
 
$
1,713,176

 
$
1,445

 
$
1,714,621

Three Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of April 1, 2020
214,122

 
$
214

 
$
4,512,939

 
$
(2,879,040
)
 
$
(39,870
)
 
$
1,594,243

 
$
3,058

 
$
1,597,301

Net loss

 

 

 
(7,347
)
 

 
(7,347
)
 

 
(7,347
)
Other comprehensive income

 

 

 

 
694

 
694

 

 
694

Contributions from noncontrolling interests

 

 

 

 

 

 
1,216

 
1,216

Termination of consolidated joint ventures

 

 
556

 

 

 
556

 
(556
)
 

Issuance of restricted shares
131

 

 

 

 

 

 

 

Stock-based compensation expense

 

 
2,221

 

 

 
2,221

 

 
2,221

Balance as of June 30, 2020
214,253

 
$
214

 
$
4,515,716

 
$
(2,886,387
)
 
$
(39,176
)
 
$
1,590,367

 
$
3,718

 
$
1,594,085

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2019
213,176

 
$
213

 
$
4,504,702

 
$
(2,756,802
)
 
$
(1,522
)
 
$
1,746,591

 
$
418

 
$
1,747,009

Net income

 

 

 
44,378

 

 
44,378

 

 
44,378

Other comprehensive loss

 

 

 

 
(9,821
)
 
(9,821
)
 

 
(9,821
)
Contributions from noncontrolling interests

 

 

 

 

 

 
1,027

 
1,027

Distributions declared to common shareholders
($0.33125 per share)

 

 

 
(70,759
)
 

 
(70,759
)
 

 
(70,759
)
Issuance of common stock
111

 

 

 

 

 

 

 

Issuance of restricted shares
469

 
1

 

 

 

 
1

 

 
1

Stock-based compensation expense, net of forfeitures
(9
)
 

 
3,823

 

 

 
3,823

 

 
3,823

Shares withheld for employee taxes
(85
)
 

 
(1,037
)
 

 

 
(1,037
)
 

 
(1,037
)
Balance as of June 30, 2019
213,662

 
$
214

 
$
4,507,488

 
$
(2,783,183
)
 
$
(11,343
)
 
$
1,713,176

 
$
1,445

 
$
1,714,621

Six Months Ended
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2020
213,600

 
$
214

 
$
4,510,484

 
$
(2,865,933
)
 
$
(12,288
)
 
$
1,632,477

 
$
3,596

 
$
1,636,073

Net income

 

 

 
15,010

 

 
15,010

 

 
15,010

Other comprehensive loss

 

 

 

 
(26,888
)
 
(26,888
)
 

 
(26,888
)
Contributions from noncontrolling interests

 

 

 

 

 

 
2,339

 
2,339

Termination of consolidated joint ventures

 

 
2,217

 

 

 
2,217

 
(2,217
)
 

Distributions declared to common shareholders
($0.165625 per share)

 

 

 
(35,464
)
 

 
(35,464
)
 

 
(35,464
)
Issuance of common stock
148

 

 

 

 

 

 

 

Issuance of restricted shares
624

 

 

 

 

 

 

 

Stock-based compensation expense

 

 
4,454

 

 

 
4,454

 

 
4,454

Shares withheld for employee taxes
(119
)
 

 
(1,439
)
 

 

 
(1,439
)
 

 
(1,439
)
Balance as of June 30, 2020
214,253

 
$
214

 
$
4,515,716

 
$
(2,886,387
)
 
$
(39,176
)
 
$
1,590,367

 
$
3,718

 
$
1,594,085

See accompanying notes to condensed consolidated financial statements

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RETAIL PROPERTIES OF AMERICA, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

 
Six Months Ended June 30,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
15,010

 
$
44,378

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
83,928

 
86,149

Provision for impairment of investment properties
346

 

Gain on sales of investment properties

 
(16,903
)
Amortization of loan fees and debt premium and discount, net
1,912

 
1,597

Amortization of stock-based compensation
4,454

 
3,823

Payment of leasing fees and inducements
(4,356
)
 
(5,120
)
Reserve for bad debt
13,977

 
589

Changes in accounts receivable
(31,647
)
 
1,332

Changes in right-of-use lease assets
928

 
961

Changes in accounts payable and accrued expenses, net
(21,899
)
 
(16,999
)
Changes in lease liabilities
33

 
(309
)
Changes in other operating assets and liabilities, net
2,696

 
4,234

Other, net
(957
)
 
(4,546
)
Net cash provided by operating activities
64,425

 
99,186

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchase of investment properties
(54,970
)
 
(26,576
)
Capital expenditures and tenant improvements
(30,778
)
 
(39,934
)
Proceeds from sales of investment properties
11,369

 
41,886

Investment in developments in progress
(32,499
)
 
(7,784
)
Net cash used in investing activities
(106,878
)
 
(32,408
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Principal payments on mortgages payable
(1,242
)
 
(1,530
)
Proceeds from unsecured notes payable

 
100,000

Proceeds from unsecured revolving line of credit
937,704

 
143,000

Repayments of unsecured revolving line of credit
(820,704
)
 
(223,000
)
Payment of loan fees and deposits
(151
)
 
(754
)
Distributions paid
(70,851
)
 
(70,758
)
Other, net
900

 
(10
)
Net cash provided by (used in) financing activities
45,656

 
(53,052
)
 
 
 
 
Net increase in cash, cash equivalents and restricted cash
3,203

 
13,726

Cash, cash equivalents and restricted cash, at beginning of period
14,447

 
19,601

Cash, cash equivalents and restricted cash, at end of period
$
17,650

 
$
33,327

(continued)
 

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RETAIL PROPERTIES OF AMERICA, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

 
Six Months Ended June 30,
 
2020
 
2019
Supplemental cash flow disclosure, including non-cash activities:
 
 
 
Cash paid for interest, net of interest capitalized
$
34,234

 
$
33,276

Cash paid for amounts included in the measurement of operating lease liabilities
$
2,505

 
$
3,052

Cash received for accounts receivable previously written off
$
54

 
$
112

Distributions payable
$

 
$
35,388

Accrued capital expenditures and tenant improvements
$
8,938

 
$
7,403

Accrued leasing fees and inducements
$
1,127

 
$
673

Accrued redevelopment costs
$
2,531

 
$
281

Amounts reclassified to developments in progress
$
305

 
$
13,570

Change in noncontrolling interest due to termination of joint ventures
$
2,217

 
$

Lease liabilities arising from obtaining right-of-use lease assets
$
383

 
$
103,519

Straight-line ground rent liabilities reclassified to right-of-use lease asset
$

 
$
31,030

Straight-line office rent liability reclassified to right-of-use lease asset
$

 
$
507

Acquired ground lease intangible liability reclassified to right-of-use lease asset
$

 
$
11,898

 
 
 
 
Purchase of investment properties (after credits at closing):
 
 
 
Net investment properties
$
(58,760
)
 
$
(25,438
)
Right-of-use lease assets
5,999

 

Accounts receivable, acquired lease intangibles and other assets
(1,801
)
 
(1,525
)
Lease liabilities
(5,942
)
 

Accounts payable, acquired lease intangibles and other liabilities
5,534

 
387

Purchase of investment properties (after credits at closing)
$
(54,970
)
 
$
(26,576
)
 
 
 
 
Proceeds from sales of investment properties:
 
 
 
Net investment properties
$
11,307

 
$
29,318

Right-of-use lease assets

 
8,242

Accounts receivable, acquired lease intangibles and other assets
167

 
1,591

Lease liabilities

 
(11,326
)
Accounts payable, acquired lease intangibles and other liabilities
(105
)
 
(2,842
)
Gain on sales of investment properties

 
16,903

Proceeds from sales of investment properties
$
11,369

 
$
41,886

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents, at beginning of period
$
9,989

 
$
14,722

Restricted cash, at beginning of period (included within “Other assets, net”)
4,458

 
4,879

Total cash, cash equivalents and restricted cash, at beginning of period
$
14,447

 
$
19,601

 
 
 
 
Cash and cash equivalents, at end of period
$
12,563

 
$
28,456

Restricted cash, at end of period (included within “Other assets, net”)
5,087

 
4,871

Total cash, cash equivalents and restricted cash, at end of period
$
17,650

 
$
33,327


See accompanying notes to condensed consolidated financial statements

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RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Readers of this Quarterly Report should refer to the audited financial statements of Retail Properties of America, Inc. for the year ended December 31, 2019, which are included in its 2019 Annual Report on Form 10-K, as certain footnote disclosures which would substantially duplicate those contained in the Annual Report have been omitted from this Quarterly Report. In the opinion of management, all adjustments necessary, all of which were of normal recurring nature, for a fair presentation have been included in this Quarterly Report.
(1) ORGANIZATION AND BASIS OF PRESENTATION
Retail Properties of America, Inc. (the Company) was formed on March 5, 2003 and its primary purpose is to own and operate high quality, strategically located open-air shopping centers, including properties with a mixed-use component. As of June 30, 2020, the Company owned 102 retail operating properties in the United States.
The Company has elected to be taxed as a real estate investment trust (REIT) under the Internal Revenue Code of 1986, as amended (the Code). The Company believes it qualifies for taxation as a REIT and, as such, the Company generally will not be subject to U.S. federal income tax on taxable income that is distributed to its shareholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal income tax on its taxable income. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income, property or net worth and U.S. federal income and excise taxes on its undistributed income. The Company has one wholly owned subsidiary that has jointly elected to be treated as a taxable REIT subsidiary (TRS) and is subject to U.S. federal, state and local income taxes at regular corporate tax rates. The income tax expense incurred by the TRS did not have a material impact on the Company’s accompanying condensed consolidated financial statements.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. For example, significant estimates and assumptions have been made with respect to capitalization of development costs, provision for impairment, including estimates of holding periods, capitalization rates and discount rates (where applicable), and initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to property acquisitions and initial recognition of right-of-use lease assets and lease liabilities. Actual results could differ from these estimates.
In accordance with Accounting Standards Codification Topic 205, Presentation of Financial Statements, certain prior year balances have been reclassified in order to conform to the current period presentation. Specifically, for the six months ended June 30, 2019, the reserve for bad debt has been presented in a single line item, “Reserve for bad debt” rather than the previous presentation where it was included as a component of “Other, net” in the accompanying condensed consolidated statements of cash flows within “Cash flows from operating activities.” There has been no change to “Net cash provided by operating activities” for the six months ended June 30, 2019 as a result of this reclassification.
All share amounts and dollar amounts in this Quarterly Report on Form 10-Q, including the condensed consolidated financial statements and notes thereto, are stated in thousands with the exception of per share, per square foot and per unit amounts.
The accompanying condensed consolidated financial statements include the accounts of the Company, as well as all wholly owned subsidiaries and consolidated variable interest entities (VIEs). All intercompany balances and transactions have been eliminated in consolidation. Wholly owned subsidiaries generally consist of limited liability companies, limited partnerships and statutory trusts.
In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (COVID-19) a global pandemic. COVID-19 has caused, and could continue to cause, significant disruptions to the U.S. and global economy, including the retail sector within the U.S., and has contributed to significant volatility and negative pressure in the financial markets. The global impact of the COVID-19 pandemic has been rapidly evolving and many U.S. states and cities, including where the Company owns properties and/or has development sites, imposed measures during the first half of the year intended to control its spread, such as instituting “shelter-in-place” rules, limitations on public gatherings and restrictions on certain business operations and/or the types of construction projects that may continue. As a result of the pandemic and the measures noted above to mitigate its impact, a number of the Company’s tenants were required to temporarily close their stores or modify their operations and, as a result,

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RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

requested lease concessions. Certain other tenants, many of which are considered essential businesses, remain open and continue to operate during this time.
The Company only closed a small, enclosed portion of one property for a period of time during the six months ended June 30, 2020. As of June 30, 2020, all of the Company’s properties were open for the benefit of the communities and customers that the Company’s tenants serve and approximately 90% of the Company’s tenants, based on gross leasable area, were open as of June 30, 2020. While many U.S. states and cities have eased or lifted such restrictions, some have subsequently reinstated restrictions and others may do so in the future.
The Company continues to closely monitor the impact of the pandemic on all aspects of its business. Due to numerous uncertainties, it is not possible to accurately predict the ultimate impact the pandemic will have on the Company’s financial condition, results of operations and cash flows.
During the three months ended June 30, 2020, the Company agreed in principle, and, in certain circumstances, executed agreements, with tenants regarding lease concessions. See a discussion regarding lease concessions signed and agreed in principle as a result of the COVID-19 pandemic and related accounting treatment in Note 2 and Note 6 to the condensed consolidated financial statements.
The Company’s property ownership as of June 30, 2020 is summarized below:
 
Property Count
Retail operating properties
102

Expansion and redevelopment projects:
 
Circle East
1

One Loudoun Downtown – Pads G & H (a)

Carillon
1

The Shoppes at Quarterfield
1

Total number of properties
105

(a)
The operating portion of this property is included within the property count for retail operating properties.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Refer to the Company’s 2019 Annual Report on Form 10-K for a summary of its significant accounting policies. Except as disclosed below, there have been no changes to the Company’s significant accounting policies in the six months ended June 30, 2020.
Lease Income and Accounts Receivable
The Company commences recognition of lease income on its leases based on a number of factors. In most cases, revenue recognition under a lease begins when the lessee takes possession or controls the physical use of the leased asset. Generally, this occurs on the lease commencement date. At lease commencement, the Company expects that collectibility is probable for all leases due to the creditworthiness analysis performed before entering into a new lease. Lease income, for leases that have fixed and measurable rent escalations, is recognized on a straight-line basis over the term of each lease. The difference between such lease income earned and the cash rent due under the provisions of a lease is recorded as deferred rent receivable and is included as a component of “Accounts and notes receivable, net” in the accompanying condensed consolidated balance sheets.
Throughout the lease term, individual leases are assessed for collectibility and upon the determination that the collection of rents over the remaining lease life is not probable, lease income is adjusted such that it is recognized on the cash basis of accounting. The Company will remove the cash basis designation and resume recording lease income from such tenants during the period earned at such time it believes that the collection of rent over the remaining lease term is probable and, generally, based upon a demonstrated payment history.
As a result of ongoing discussions with tenants regarding lease concession requests as a result of the COVID-19 pandemic, the Company reserves for lease concessions that have been agreed in principle with the tenant for which a reduction in lease income is anticipated under the accounting for lease concessions once executed. In addition, a general portfolio reserve is established based

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RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

upon an analysis of balances outstanding, historical bad debt levels and current economic trends. An allowance for the uncollectible portion of uncollected receivables is recorded as an adjustment to lease income.
The Company reviews current economic considerations each reporting period, including the effects of tenant bankruptcies. Additionally, with the uncertainties regarding COVID-19 as well as ongoing discussions with tenants regarding lease concession requests, the Company’s assessment also takes into consideration items such as tenant type, local restrictions regarding tenant operations, the current status of lease concession requests, as well as recent rent collection experience. Evaluating and estimating uncollectible lease payments and related receivables requires a significant amount of judgment by management and is based on the best information available to the Company at the time of evaluation.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses. This new guidance was effective January 1, 2020 and replaced the incurred loss impairment methodology with a methodology that reflects expected credit losses. Financial assets that are measured at amortized cost are required to be presented at the net amount expected to be collected with an allowance for credit losses deducted from the amortized cost basis. In addition, an entity must consider broader information in developing its expected credit loss estimate, including the use of forecasted information. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, which clarifies that receivables arising from operating leases are not within the scope of this new guidance. Generally, the pronouncement requires a modified retrospective method of adoption. The adoption of this pronouncement on January 1, 2020 did not have any effect on the Company’s consolidated financial statements as it did not have any financial assets within the scope of this guidance.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement. This new guidance was effective January 1, 2020 and provides new and, in some cases, eliminates or modifies the previously existing disclosure requirements on fair value measurements. Public entities are now required to disclose the following: (i) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. In addition, public entities are no longer required to disclose the following: (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (ii) the policy for timing of transfers between levels and (iii) the valuation processes for Level 3 fair value measurements. The new pronouncement also clarifies and modifies certain existing provisions to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and clarifies that materiality is an appropriate consideration when evaluating disclosure requirements. As permitted by the new pronouncement, the Company removed the discussion of its valuation processes for Level 3 fair value measurements. The Company did not remove any other disclosures as it did not have any transfers between levels of the fair value hierarchy during the current and comparative periods. The adoption of this pronouncement on January 1, 2020 did not have any effect on the Company’s consolidated financial statements. The amended disclosure guidance will be applied prospectively.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform. This temporary guidance is effective as of March 12, 2020 through December 31, 2022 to ease potential burdens related to the accounting for, or recognizing the effects of, reference rate reform on financial reporting. The guidance provides optional expedients for applying existing GAAP to contract modifications and hedging relationships affected by the move of global capital markets away from interbank offered rates, most notably the London Interbank Offered Rate (LIBOR). Specifically, the guidance allows for certain changes in critical terms of a designated hedging instrument or hedged item as a result of reference rate reform to not result in the dedesignation of the hedging relationship. In addition, the optional expedients related to probability and effectiveness assessments allow companies to disregard certain economic mismatches in a hedging relationship arising due to reference rate reform until both the derivative and hedged transactions have completed the transition, where current GAAP requires those mismatches to be modeled into the assessment of effectiveness. The Company adopted this guidance as of the effective date and elected to apply the optional expedients related to probability and effectiveness prospectively. The Company has not modified any hedging relationship and has disregarded the potential economic mismatches in hedging relationships due to reference rate reform during the six months ended June 30, 2020.
Recently Issued Accounting Pronouncements
In April 2020, the FASB staff issued a question-and-answer (Q&A) document focusing on the application of the lease guidance in ASC 842, Leases, for lease concessions provided as a result of the COVID-19 pandemic. Prior to the Q&A, changes to lease

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RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

payments that are not stipulated in the original lease contract are generally accounted for as lease modifications under ASC 842. Within the Q&A, the FASB staff provides relief for lease concessions offered as a result of the effects of the COVID-19 pandemic and does not require these concessions to be accounted for in accordance with the lease modification guidance in ASC 842.
Under existing lease guidance, a company determines, on a lease-by-lease basis, if a lease concession is the result of a new arrangement with the tenant or if it is under the enforceable rights and obligations within the lease agreement. Under the relief guidance, a company can account for certain concessions (i) as if no changes to the existing lease contract were made or (ii) as a negative variable lease adjustment to lease income. This optionality is offered in circumstances when the total future payments required by the modified contract are substantially the same as the total payments required by the existing contract. Also, under the relief guidance, a company can account for certain other concessions only as a variable lease adjustment. This singular relief option is offered in circumstances including when the total future payments required by the modified contract are less than the total payments required by the existing contract (i.e., abatement) or when the total payments required are the same, but extend over a longer period of time as compared to the existing contract.
Application of the relief guidance is optional, however it is required to be applied consistently to leases with similar characteristics and similar circumstances. The Company has elected to apply the relief guidance where lease concessions are (i) granted as relief due to the COVID-19 pandemic and (ii) result in the cash flows remaining to be substantially the same or less than the existing contract.
Based on the policy elections made under the relief guidance as well as modifications that do not qualify for the relief guidance, the Company has accounted for lease concessions as follows:
Lease Concession
 
Accounting Treatment of Concession
 
 
 
(i) Deferral of payment to a future period, with no change in lease term.
 
Treated as if there are no changes to the existing lease contract; no change to lease income recognized, including straight-line rental income.
 
 
 
(ii) Deferral of payment to a future period, with a modest extension of lease term
(iii) Abatement
(iv) Combination of abatement and deferral
 
Treated as a variable lease adjustment; reduction in lease income for the abated and deferred amounts; however, no change in straight-line rental income. Any deferred amounts will be recognized as lease income when payment is received.
 
 
 
(v) Significant lease extension resulting in an increase in cash flows
 
Existing lease modification guidance under ASC 842 is followed.
See a discussion regarding lease concessions agreed with tenants as a result of the COVID-19 pandemic and related impact in Note 6 to the condensed consolidated financial statements.
(3) ACQUISITIONS AND DEVELOPMENTS IN PROGRESS
Acquisitions
The Company closed on the following acquisition during the six months ended June 30, 2020:
Date
 
Property Name
 
Metropolitan
Statistical Area (MSA)
 
Property Type
 
Square
Footage
 
Acquisition
Price
 
February 6, 2020
 
Fullerton Metrocenter
 
Los Angeles
 
Fee interest (a)
 
154,700

 
$
55,000

 
 
 
 
 
 
 
 
 
154,700

 
$
55,000

(b)
(a)
The Company acquired the fee interest in an existing multi-tenant retail operating property. In connection with this acquisition, the Company also assumed the lessor position in a ground lease with a shadow anchor.
(b)
Acquisition price does not include capitalized closing costs and adjustments totaling $240.

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RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The Company closed on the following acquisitions during the six months ended June 30, 2019:
Date
 
Property Name
 
MSA
 
Property Type
 
Square
Footage
 
Acquisition
Price
 
March 7, 2019
 
North Benson Center
 
Seattle
 
Multi-tenant retail
 
70,500

 
$
25,340

 
June 10, 2019
 
Paradise Valley Marketplace – Parcel
 
Phoenix
 
Land (a)
 

 
1,343

 
 
 
 
 
 
 
 
 
70,500

 
$
26,683

(b)

(a)
The Company acquired a parcel adjacent to its Paradise Valley Marketplace multi-tenant retail operating property. The total number of properties in the Company’s portfolio was not affected by this transaction.
(b)
Acquisition price does not include capitalized closing costs and adjustments totaling $291.
The following table summarizes the acquisition date values, before prorations, the Company recorded in conjunction with the acquisitions discussed above:
 
Six Months Ended June 30,
 
2020
 
2019
Land
$
57,137

 
$
14,819

Building and other improvements, net
1,623

 
10,619

Acquired lease intangible assets (a)
2,014

 
1,770

Acquired lease intangible liabilities (b)
(5,534
)
 
(234
)
Net assets acquired
$
55,240

 
$
26,974


(a)
The weighted average amortization period for acquired lease intangible assets is 17 years and five years for acquisitions completed during the six months ended June 30, 2020 and 2019, respectively.
(b)
The weighted average amortization period for acquired lease intangible liabilities is 17 years and five years for acquisitions completed during the six months ended June 30, 2020 and 2019, respectively.
These acquisitions were funded using a combination of available cash on hand, proceeds from dispositions and proceeds from the Company’s unsecured revolving line of credit. All of the acquisitions completed during 2020 and 2019 were considered asset acquisitions and, as such, transaction costs were capitalized upon closing.
In addition, the Company capitalized $641 and $1,267 of internal salaries and related benefits of personnel directly involved in capital upgrades and tenant improvements during the three and six months ended June 30, 2020, respectively, and $650 and $1,325 during the three and six months ended June 30, 2019, respectively. The Company also capitalized internal leasing incentives of $42 and $102 during the three and six months ended June 30, 2020, respectively, and $82 and $136 during the three and six months ended June 30, 2019, respectively, all of which were incremental to signed leases.
Developments in Progress
The carrying amount of the Company’s developments in progress are as follows:
Property Name
 
MSA
 
June 30, 2020
 
December 31, 2019
Expansion and redevelopment projects
 
 
 
 
 
 
Circle East (a)
 
Baltimore
 
$
35,298

 
$
33,628

One Loudoun Downtown
 
Washington, D.C.
 
51,903

 
27,868

Carillon
 
Washington, D.C.
 
32,264